A giant hoarding hiding restoration work on the ornate façade of Milan’s gothic cathedral, even more the city’s symbol than La Scala opera house, brags about Banca Intesa’s commitment to social advancement and economic growth, and to overcoming poverty and under-development. Fortunately for its shareholders, while undertaking this slew of good works, Banca Intesa’s management has not forgotten about banking.
On August 26, Intesa, which is Milan’s and Italy’s second biggest bank, announced what may turn out to be Europe’s biggest banking merger this year. It plans to merge with Sanpaolo IMI, the biggest bank in Turin and Italy’s third largest, in a deal that should become effective by the end of the year. The prospective new bank, whose name was not revealed when the deal was announced, will be the country’s biggest with a network of more than 6000 branches and market capitalisation of more than €65bn.
Significant deal
The merger is significant for several reasons. First, it is evidence that under the governorship of Mario Draghi, the Bank of Italy has been pulled back from what Antonio Fazio, Mr Draghi’s predecessor, saw as its role as matchmaker for consolidation in the country’s banking system. Second, despite the usual chatter in the Italian press about political factors, and the deal being done thanks to the political colour of important actors in it, the merger is market-driven. And it is good for the smaller shareholders of both banks. Third, the deal will create a bank that will not only be Italy’s biggest domestic institution by far, but will also be extremely strong in the north, the country’s wealthiest regions. Fourth, the deal is close to a merger of equals.
The market capitalisation of Banca Intesa after the announcement of the merger was €35.4bn; Sanpaolo IMI’s was €30.2bn. The return on equity at Banca Intesa was 15.6% against 15.1% at Sanpaolo IMI. There were murmurs about the operation being a takeover of Sanpaolo IMI by Banca Intesa;
| and, in that Banca Intesa’s managing director Corrado Passe will be the chief executive of the new entity, the Milanese bank does appear to be the winner. But somebody had to be boss and Mr Passera has shown himself to be a smart operator. |
Corrado Passera: smart operator with a good track record to take the managing director role
Another point that the deal hammers home is that Italy’s banking system can no longer be called a “petrified forest”, which is how it was described by Giuliano Amato who, when treasury minister at the beginning of the 1990s, was behind the law that bears his name. Then, the Bank of Italy was just beginning to relax its grip on branch openings and about two-thirds of the banking system belonged in the public sector, with appointments decided in offices of Italy’s political parties.
There were three banks of national interest controlled by the state-holding corporation Istituto per la Ricostruzione Industriale (IRI): Banca Commerciale Italiana (BCI, which became part of Banca Intesa), Credito Italiano (the aggregating bank for UniCredit) and Banco di Roma (now Capitalia). There were six public law credit institutions: San Paolo di Torino, Monte dei Paschi di Siena, Banca Nazionale del Lavoro, Banco di Napoli, Banco di Sicilia and Banco di Sardegna. Banco di Napoli was taken over by Sanpaolo IMI in 2000 and Banco di Sicilia by Capitalia. About 70 savings banks completed the broad panorama of public-sector banks, including Cassa di Risparmio delle Province Lombarde (Cariplo, the large Milanese savings bank that was a founder of Banca Intesa) and the Cassa di Risparmio di Torino and Cassa di Risparmio di Verona, Vicenza, Belluno e Ancona that became part of UniCredit.
The Amato Law required the public law credit institutions and savings banks to spin off their banking operations into joint stock companies, the shares being owned by newly constituted foundations that were encouraged to list the banks and bring in private shareholders.
Coming of age
The merger between Sanpaolo IMI and Banca Intesa represents a coming of age for Italian banking. The new entity will have a free float of 58.5% and the five banking foundations of the different constituent public-sector banks a total of 20.1%, the Compagnia Sanpaolo with 7.0% and the Fondazione Cariplo with 4.7% being the biggest. Just as the operation gives lie to the notion that Italian banking is a petrified forest, it also belies the idea that the banking system is still in the grip of public-sector foundations.
Developments in the past decade are the evidence of the huge shift that has occurred in Italian banking, and the merger might be seen as the culmination of an epoch-destroying and epoch-making period. Some banks have shown their capacity to lead, others have been left behind. Both involved in the deal have been among the former, and both have successful records of consolidation. Banca Intesa’s goes back furthest, to 1990 when Nuovo Banco Ambrosiano, under the chairmanship of Giovanni Bazoli, merged with Banca Cattolica del Veneto.
Mr Bazoli, who oversaw the rebirth of the Banco Ambrosiano after its crash in 1982, was a driving force behind this summer’s deal. During the 1990s, he brokered mergers with Cariplo and BCI, once reckoned to be Italy’s best bank.
Sanpaolo IMI’s record includes the mergers of Istituto Bancario San Paolo di Torino with Istituto Mobiliare Italiano (IMI, a Rome-based investment bank) in 1998, Banco di Napoli in 2000 and Cardine, a savings bank in the north-east of Italy in 2001.
Cost savings
What will this latest merger produce? A large cost saving ought to be one result. Announcing the deal, the banks said that they expected to achieve €1.3bn of cost synergies in 2009. Matteo Ramenghi, an analyst at UBS in Milan, believes this target is achievable. “Previous transactions in Italy have shown cost savings in excess of 17% of the acquired banks’ costs and revenue synergies amounted to over 11% of their revenues,” he says.
Much will depend on management and in Mr Passera the new entity has somebody with a track record. “I see little execution risk,” says John Andrew, chairman of Eidos Partners, a boutique investment bank in Milan. Mr Andrew was involved in numerous major banking operations in Italy when the system was a petrified forest and considers the deal to be an important step forward.
“There will be a big knock-on effect as the deal shatters the old equilibrium at the top of the banking system,” he says. The new bank will have a market share of nearly 24% in Lombardy, which alone accounts for one-fifth of Italy’s GDP, and similar market shares in Veneto and Piedmont, which are also wealthy regions.
“Doubling domestic market share will lead to a significant competitive advantage in retail and stronger positioning in corporate and product areas,” says Mr Ramenghi.
Pressure on UniCredit
With just 5.4% of the Lombardy market, UniCredit, Italy’s biggest bank and the front-runner during the opening years of this decade, will be under pressure to respond.
“What will UniCredit do now? Will it take over Capitalia?” asks Mr Andrew. Certainly Capitalia is vulnerable. It spurned a deal with Banca Intesa earlier this year, which was probably a mistake. One issue is Capitalia’s concentration in the centre of Italy and in Sicily where lending is riskiest. Another is that the Rome-based bank is arguably overvalued. Under Alessandro Profumo, UniCredit has been an intelligent mover; it would probably baulk at paying top dollar for Capitalia, and may prefer to see what it can pick up when the new bank rationalises its operations. As for Monte dei Paschi di Siena (MPS), it seems to have settled for a role as a large regional bank with limited ambitions. The tie-up between Banca Intesa and Sanpaolo IMI seems to have turned both Capitalia and MPS into also-rans.
Might the deal stumble before getting to the finishing line? Mr Andrew believes that it is unlikely that shareholders will reject what the boards of directors have agreed. However much some large shareholders may huff and puff – probably because they reckon they deserve special treatment – the deal looks good for the mass of investors in the two banks. That is progress in a country where small outsiders have often been left outside while the large insiders have shared the spoils.
